The Fountain Valley City Council voted Tuesday to increase the advantage it offers local businesses that bid for city contracts, saying companies based in the city need the financial edge because of the high cost of doing business there.

The council voted 4-1, with Councilman John Collins dissenting, to extend the current 1 percent local preference to 5 percent. The change gives local businesses up to 5 percent leeway to qualify as the lowest bidder when competing against non-local bidders on city contracts.

It would not apply to public works contracts, cooperative contracts, or deals for professional services.

The ordinance, proposed by Mayor Michael Vo, will have to come before the council for a second time for approval before becoming law.

Local preference policies boost the local economy, according to city staff, citing the “multiplier effect” that occurs through the recirculation of revenue through a local sale. By spending money on a local vendor, the city not only collects additional sales tax, but also passes the benefit onto other local businesses that get secondary revenue as a result of the vendor’s business.

Although city officials have authority over their purchasing rules, companies have taken local preference policies to court on the grounds they violate certain constitutional protections, limiting what cities can do.

In a 1987 case against the city of San Francisco, where the city’s 5 percent local preference policy was challenged for violating non-local companies’ right to equal protection, a court ruled the policy was valid if used to offset disadvantages facing local businesses, such as a high cost of doing business.

The policy has also been challenged as an unconstitutional discrimination based on residency. The U.S. Supreme Court found that such a preference on local business cannot burden a “fundamental interest” and there must be “substantial” reason for the different treatment.

In other words, local preference policies must be justified and no more than what is needed, according to a staff report.

In Fountain Valley, staff cited the high cost of commercial rent in the city, driven in part by rising home values in the area and a preference in the city’s general plan for residential and park uses over commercial space.

Home values are expected to rise 7 percent annually through 2018, from $517,000 to $735,000, according to a city-commissioned report by the Concord Group.

Staff also argued businesses in Fountain Valley face high fees for paramedics, business licenses, and property tax.

Collins took issue with the lack of analysis justifying the claim that businesses face higher costs in the city,

“I haven’t seen any analysis specifically [speaking] to that, but the folks over at Kosmont Rose indicate it’s less costly to do business,” Collins said, citing a Kosmont Rose Institute study that ranked Fountain Valley among the least expensive cities to do business in California. The Kosmont Rose Institute is affiliated with Claremont McKenna College.

A number of other Orange County cities have implemented similar policies to favor local vendors. Costa Mesa  and Irvine both have 5 percent discounts for local bids. 

Anaheim gives a 1 percent local preference, while Santa Ana has a sliding scale that gives a 1 percent discount to all city businesses, 7 percent for small city businesses, and 4 percent for small Orange County businesses. 

The State of California also has a 5 percent local preference for small businesses.

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